Milan Panchmatia examines how supply chains have been affected by recent natural disasters and how businesses have sought to minimise future risks.
Globalisation has provided businesses across the globe with countless opportunities to reshape their supply chains and reach out to new customers. In some sectors, the sheer number of suppliers available has allowed leading organisations to completely alter their business models and no longer have to compromise between quality and quantity.
However, alongside these opportunities comes risk. Running a global supply chain requires a detailed understanding of the inherent risks that the company might face as well as having a strategy for dealing with issues when they do arise. These challenges are further compounded by businesses which focus on maintaining Lean operations, in particular where ‘just in time’ principals are applied. Having a combination of multiple suppliers and limited inventory within a complex and Lean operation can be a recipe for disaster if not properly managed.
One country which is famed for its Lean approach to production is Japan. In this piece, I will explore the fallout from the recent earthquake and see how Japanese businesses are trying to balance risk and reward.
Responding to natural disasters
Natural disasters are amongst the most difficult risks to predict. The sheer variety and impact of such an event can have wide-ranging consequences, which can be problematic for businesses to quantify. Take the recent earthquake in Japan.
A number of companies have found themselves severely affected by the disaster, including Toyota, Honda and Sony. The former has had to shut down production across a number of plants in the country, costing an estimated $277m. A situation which has highlighted the danger of its “just in time” approach to managing inventory.
Toyota favours a system which relies on the company only ordering parts from suppliers when they are needed. An earthquake in 2011 had already exposed the risk inherent with such a process and the company had since investigated how key suppliers had been affected and how to mitigate future risks. As part of the process, a supply chain database was developed, in order to work out how supply might be disrupted if a repeat were to occur.
Balancing risk and reward
Aisin Seiki, one of Toyota’s affected suppliers, has explained that parts produced in facilities shut down by the earthquake, will temporarily be produced in plants both in Japan and abroad. The supplier added that although it did not stock large inventories, due to Toyota policy, robust plans were in place to migrate production of key components.
Another affected supplier, Renesas, which produces semiconductors, took a different approach. Following the 2011 quake, the business suffered severe delays and was unable to fulfill a number of orders on time. As a result, the company has focussed on standardising the various models it produces, in an attempt to enable it to shift production to alternative sites more easily.
Flexibility and control
Investing in supplier relationships is one way of mitigating risk, albeit one which needs to be balanced against the possibility of sourcing from multiple suppliers. In this context, Toyota has demonstrated a remarkable attachment to its lean principles. This is no surprise given the company’s role in developing what is known as the ‘Toyota Production System’ back in 1948. However, as recent disasters have illustrated, such an approach is not without its risks – namely the lack of flexibility such a process engenders and the associated costs these disasters produce from the lack of production.
Mitigating these risks, and continuing to profit from the benefits of the system, are reliant on suppliers making the same commitment to risk management as Toyota. A difficult request for the car manufacturer to make, without committing substantial resources to managing supplier relationships. It is no surprise that the car manufacturer is often cited as a prime example of Supplier Relationship Management done right.